Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
In Q3FY11, Union Bank of India (UBI) reported NII of INR 16.2 bn (up 5% Q-o-Q,
52% Y-o-Y), ahead of our estimate (INR 15.2 bn), supported by higher-thanexpected
NIMs (3.44%) and robust loan book growth (up 7.8% Y-o-Y). Margins were
up 23bps Q-o-Q, supported by improvement of 58bps in CASA ratio (33.3%) and
180bps in CD ratio (71.7%), along with stable yield on advances/cost of deposits.
Asset quality woes, however, continue with incremental slippages running high
(though on a declining trend) at INR 7.6 bn (2.9%). Aggressive write offs during the
quarter curtailed the rise in gross NPLs to INR 35.8 bn (2.68%). Provision coverage
remained stable at 70.2%. Deposit growth (5% Q-o-Q) lagged loan book growth.
However, traction in savings account continued to impress (up 10.4% Q-o-Q). Staff
expenses declined sequentially, as cumulative provisioning for retirement benefits
during Q2FY11 normalised during the quarter.
Margins surprise positively; up 23bps Q-o-Q
NIMs (adjusted for one-offs) improved sequentially by 23bps to 3.44%, well
ahead of our estimates, on the back of: (a) 180bps expansion in CD ratio
(71.7%); (b) 58bps improvement in CASA ratio (33.3%); and (c) marginal
improvement in yield in advances (2bps), which offset an equivalent increase in
cost of deposits. Supported by higher-than-expected NIMs and robust loan book
growth (7.8% Q-o-Q), NII came in at INR 16.2 bn (our estimate: INR 15.2 bn).
Management expects to close FY11 with NIMs in the close 3.1-3.2%. We are
building in NIMs calculated of 2.8% over FY11-12.
Outlook and valuations: Strong core, NPLs to recede; maintain ‘BUY’
While robust loan book growth and higher-than-expected margins continued to
support core profitability, high level of slippages (though on a declining trend)
and feeble pick up in term deposits (despite three rate hikes during the quarter),
continue to be areas of concern. We estimate 19.8% CAGR in earnings over
FY11-12 on the back of 24% loan book growth and 2.8% NIMs (cal.). The stock
is currently trading at 1.4xFY12E (down from 1.9x) adjusted book, delivering
ROE of 23.7% over FY11-12E. We maintain ‘BUY/Sector Outperformer’
recommendation/rating on the stock.
Slippages in asset quality
Though incremental slippages declined sequentially to INR 7.65 bn (2.9%) in Q3FY11
from INR 11.3 bn (4.5%) in Q2FY11, they remain above the trend (1.7% average over
FY09-10). Slippages during the quarter included a single account of INR 2 bn. Recoveries
and upgradations came in at INR 2.56 bn (H1: INR 4.86 bn). On account of aggressive
write offs (Q3: INR 4.5 bn, H1: INR 4.1 bn), bank curtailed the rise in gross NPL to INR
35.8 bn (2.68%), up 1.6% Q-o-Q. Net NPLs jumped 9.3% Q-o-Q to INR 15.9 bn (1.2%).
Credit costs stood at 135bps (Q2: 258bps); provision coverage (including write offs)
remained stable at 70.2%). Management guided to reign in GNPA ratio at 2.4% (up from
2.3% target in Q2FY11). Further, it expects to close the year with delinquency ratio of
2.5-2.6% and credit costs of 1.1-1.2% and expects both ratios to drop to half by end of
FY12. Bank restructured INR 1.4 bn (0.1% of loan book) of assets during quarter, taking
the total restructured assets to INR 53 bn (4% of assets). INR 2,242 mn of restructured
book slipped during quarter (H1: INR 2,290 mn), taking total slippages in restructured
book to close to 15%.
Business momentum picks up
After remaining sequentially flat in Q2FY11, the loan book (during Q3FY11) gathered
steam with 7.8% Q-o-Q growth (25.6% Y-o-Y), in line with the management guidance.
During the quarter, traction remained strong in large corporate (10% Q-o-Q) and
agriculture (7.5% Q-o-Q), while retail (4.5% Q-o-Q) and SME (4% Q-o-Q) failed to keep
pace with overall loan book growth. Within industrials, the bank increased its exposure to
trade, infrastructure, metals and textiles, Q-o-Q. Deposits growth (5% Q-o-Q, 23.5% Yo-
Y) continued to lag loan book growth. While, traction in savings account (up 10.4% Qo-
Q) continues to impress, feeble term deposits growth (up only 4.1% Q-o-Q), despite
three rate hikes (once in October and twice in December), remains a cause of
concern. CASA ratio improved sequentially by 58bps to 33.3%; management is
confident of achieving the targeted 35% CASA ratio by FY12 end. At the quarter end, the
CD ratio stood at 71.6% (up 180bps Q-o-Q). Management guided for 25% loan book
growth (implying 10.5% Q-o-Q over Q4) and 20% deposit growth (implying 9% Q-o-Q
over Q4), boiling down to a CD ratio of 72.6%.
Other highlights
• Management maintained its estimate of INR 25 bn for second pension option during
the quarter. In Q2FY11, management provided INR 3.67 bn towards pension and
gratuity (as it filled up the deficit of Q1FY11). During this quarter, provision towards
retirement liabilities halved and fell in line with the normal schedule.
• Other income (ex-treasury) grew 1.8% Q-o-Q and 30% Y-o-Y, though tractions
remained strong in forex income (up 188% Q-o-Q and 49% Y-o-Y). Treasury profits
stood at INR 1,080 mn.
• Investment book stood at INR 590 bn; AFS formed 25.63% of investment book (of
which, only 54.36% is interest sensitive) with duration of 2.02 years.
• Tax-rate during quarter stood at 32.7%.
Company Description
Incorporated in 1919, Union Bank of India (UNBK) is one of the oldest banks in India. Its
network of ~2,800 branches and balance sheet size of ~INR 2.1 tn as on December
2010 makes it one of the larger bank in the country with market cap USD 3.87 bn. The
bank has the most widespread branch network in India (after SBI), with branches
distributed evenly across all regions. The bank has moved all its branches to CBS
platform. Government of India (GoI) has 55.4% equity holding in the bank as on
December 2010, followed by Foreign Institutional Investors (FIIs) with 19% stake.
The future plan of the bank comprises over 20% growth in deposits and advances
over FY11. Bank will continue to focus on a four-pronged strategy for growth. Retail,
Agri business, SME and Corporate will continue to be the four growth engines.
Containment of cost of funds will form central strategy of the Bank. The most important
being, the (NPA), UBI's gross NPA level is targeted below 2%.
Investment Theme
We like UNBK due to its high operating efficiency, one of the better asset quality, and
potential to generate high ROE average 25% FY10-12. It has one of the lowest operating
expenses-to-asset-ratio, which can be credited to its high CBS coverage, which is also
helping bank maintain its CASA which currently stands at 32.6%. The bank is also
protected, to a great extent, by the volatile interest rates with its low duration and 95%
of SLR investments in HTM category.
Key Risks
Liability management will be a key factor to grow loan book at faster than expected rate
in this scenario.
System wide deterioration of asset quality would be challenge for them to maintain their
targets of lower NPA’s.
Maintaining CASA in the current scenario would be challenge for the bank.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
In Q3FY11, Union Bank of India (UBI) reported NII of INR 16.2 bn (up 5% Q-o-Q,
52% Y-o-Y), ahead of our estimate (INR 15.2 bn), supported by higher-thanexpected
NIMs (3.44%) and robust loan book growth (up 7.8% Y-o-Y). Margins were
up 23bps Q-o-Q, supported by improvement of 58bps in CASA ratio (33.3%) and
180bps in CD ratio (71.7%), along with stable yield on advances/cost of deposits.
Asset quality woes, however, continue with incremental slippages running high
(though on a declining trend) at INR 7.6 bn (2.9%). Aggressive write offs during the
quarter curtailed the rise in gross NPLs to INR 35.8 bn (2.68%). Provision coverage
remained stable at 70.2%. Deposit growth (5% Q-o-Q) lagged loan book growth.
However, traction in savings account continued to impress (up 10.4% Q-o-Q). Staff
expenses declined sequentially, as cumulative provisioning for retirement benefits
during Q2FY11 normalised during the quarter.
Margins surprise positively; up 23bps Q-o-Q
NIMs (adjusted for one-offs) improved sequentially by 23bps to 3.44%, well
ahead of our estimates, on the back of: (a) 180bps expansion in CD ratio
(71.7%); (b) 58bps improvement in CASA ratio (33.3%); and (c) marginal
improvement in yield in advances (2bps), which offset an equivalent increase in
cost of deposits. Supported by higher-than-expected NIMs and robust loan book
growth (7.8% Q-o-Q), NII came in at INR 16.2 bn (our estimate: INR 15.2 bn).
Management expects to close FY11 with NIMs in the close 3.1-3.2%. We are
building in NIMs calculated of 2.8% over FY11-12.
Outlook and valuations: Strong core, NPLs to recede; maintain ‘BUY’
While robust loan book growth and higher-than-expected margins continued to
support core profitability, high level of slippages (though on a declining trend)
and feeble pick up in term deposits (despite three rate hikes during the quarter),
continue to be areas of concern. We estimate 19.8% CAGR in earnings over
FY11-12 on the back of 24% loan book growth and 2.8% NIMs (cal.). The stock
is currently trading at 1.4xFY12E (down from 1.9x) adjusted book, delivering
ROE of 23.7% over FY11-12E. We maintain ‘BUY/Sector Outperformer’
recommendation/rating on the stock.
Slippages in asset quality
Though incremental slippages declined sequentially to INR 7.65 bn (2.9%) in Q3FY11
from INR 11.3 bn (4.5%) in Q2FY11, they remain above the trend (1.7% average over
FY09-10). Slippages during the quarter included a single account of INR 2 bn. Recoveries
and upgradations came in at INR 2.56 bn (H1: INR 4.86 bn). On account of aggressive
write offs (Q3: INR 4.5 bn, H1: INR 4.1 bn), bank curtailed the rise in gross NPL to INR
35.8 bn (2.68%), up 1.6% Q-o-Q. Net NPLs jumped 9.3% Q-o-Q to INR 15.9 bn (1.2%).
Credit costs stood at 135bps (Q2: 258bps); provision coverage (including write offs)
remained stable at 70.2%). Management guided to reign in GNPA ratio at 2.4% (up from
2.3% target in Q2FY11). Further, it expects to close the year with delinquency ratio of
2.5-2.6% and credit costs of 1.1-1.2% and expects both ratios to drop to half by end of
FY12. Bank restructured INR 1.4 bn (0.1% of loan book) of assets during quarter, taking
the total restructured assets to INR 53 bn (4% of assets). INR 2,242 mn of restructured
book slipped during quarter (H1: INR 2,290 mn), taking total slippages in restructured
book to close to 15%.
Business momentum picks up
After remaining sequentially flat in Q2FY11, the loan book (during Q3FY11) gathered
steam with 7.8% Q-o-Q growth (25.6% Y-o-Y), in line with the management guidance.
During the quarter, traction remained strong in large corporate (10% Q-o-Q) and
agriculture (7.5% Q-o-Q), while retail (4.5% Q-o-Q) and SME (4% Q-o-Q) failed to keep
pace with overall loan book growth. Within industrials, the bank increased its exposure to
trade, infrastructure, metals and textiles, Q-o-Q. Deposits growth (5% Q-o-Q, 23.5% Yo-
Y) continued to lag loan book growth. While, traction in savings account (up 10.4% Qo-
Q) continues to impress, feeble term deposits growth (up only 4.1% Q-o-Q), despite
three rate hikes (once in October and twice in December), remains a cause of
concern. CASA ratio improved sequentially by 58bps to 33.3%; management is
confident of achieving the targeted 35% CASA ratio by FY12 end. At the quarter end, the
CD ratio stood at 71.6% (up 180bps Q-o-Q). Management guided for 25% loan book
growth (implying 10.5% Q-o-Q over Q4) and 20% deposit growth (implying 9% Q-o-Q
over Q4), boiling down to a CD ratio of 72.6%.
Other highlights
• Management maintained its estimate of INR 25 bn for second pension option during
the quarter. In Q2FY11, management provided INR 3.67 bn towards pension and
gratuity (as it filled up the deficit of Q1FY11). During this quarter, provision towards
retirement liabilities halved and fell in line with the normal schedule.
• Other income (ex-treasury) grew 1.8% Q-o-Q and 30% Y-o-Y, though tractions
remained strong in forex income (up 188% Q-o-Q and 49% Y-o-Y). Treasury profits
stood at INR 1,080 mn.
• Investment book stood at INR 590 bn; AFS formed 25.63% of investment book (of
which, only 54.36% is interest sensitive) with duration of 2.02 years.
• Tax-rate during quarter stood at 32.7%.
Company Description
Incorporated in 1919, Union Bank of India (UNBK) is one of the oldest banks in India. Its
network of ~2,800 branches and balance sheet size of ~INR 2.1 tn as on December
2010 makes it one of the larger bank in the country with market cap USD 3.87 bn. The
bank has the most widespread branch network in India (after SBI), with branches
distributed evenly across all regions. The bank has moved all its branches to CBS
platform. Government of India (GoI) has 55.4% equity holding in the bank as on
December 2010, followed by Foreign Institutional Investors (FIIs) with 19% stake.
The future plan of the bank comprises over 20% growth in deposits and advances
over FY11. Bank will continue to focus on a four-pronged strategy for growth. Retail,
Agri business, SME and Corporate will continue to be the four growth engines.
Containment of cost of funds will form central strategy of the Bank. The most important
being, the (NPA), UBI's gross NPA level is targeted below 2%.
Investment Theme
We like UNBK due to its high operating efficiency, one of the better asset quality, and
potential to generate high ROE average 25% FY10-12. It has one of the lowest operating
expenses-to-asset-ratio, which can be credited to its high CBS coverage, which is also
helping bank maintain its CASA which currently stands at 32.6%. The bank is also
protected, to a great extent, by the volatile interest rates with its low duration and 95%
of SLR investments in HTM category.
Key Risks
Liability management will be a key factor to grow loan book at faster than expected rate
in this scenario.
System wide deterioration of asset quality would be challenge for them to maintain their
targets of lower NPA’s.
Maintaining CASA in the current scenario would be challenge for the bank.
No comments:
Post a Comment